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Tilray Inc., a marijuana company valued at nearly $9 billion, currently trades at a price-to-sales ratio of about 124. That’s more than 25 times higher than Amazon Inc. and Apple Inc., the two most valuable companies in the S&P 500. And Canopy Growth Corp.’s $11 billion-plus market value is on par with Barrick Gold Corp.’s, even though the mining firm, with 18,000 workers, is expected to post 20 times the sales this year as the 1,000-employee cannabis company.

“It’s still not a grown-up sector by a lot of portfolio managers’ standards,” said Bruce Campbell, founder of StoneCastle Investment Management Inc., which is launching a cannabis-focused mutual fund. “The valuations are off the charts if you use any type of typical metrics, so that scares a lot of institutions.”

As Canada prepares to legalize marijuana on Oct. 17, the cannabis industry has soared from virtually nothing five years ago to one with global sweep today. Canadian companies, such as Canopy, Tilray, Aurora Cannabis Inc. and Aphria Inc., are leading the way. Global consumer spending on cannabis is expected to reach $32 billion by 2022, according to U.S. firms Arcview Market Research and BDS Analytics.

Jeff Sessions

Recreational use is now legal in nine U.S. states and the District of Columbia, and countries from the U.K. to Mexico are in the process of approving use of medical marijuana. But a lot of cannabis investing depends on the continued march toward legalization in the U.S., which is difficult to handicap given gridlock in Congress and Attorney General Jeff Sessions’s antipathy. Marijuana remains illegal federally in the U.S.

The latest investment frenzy really got rolling last month when Constellation Brands Inc., the maker of Corona beer, announced a $3.8 billion stake in Canopy. Since then, the BI Canada Cannabis Competitive Peers index has gained 45 percent. Large public companies and institutional investors had largely avoided the marijuana industry, fearful of running afoul of U.S. law. Constellation’s investment was seen as a validation.

The growth potential in marijuana has yet to translate into big sales or profits. Tilray reported second-quarter revenue of $9.7 million. Aurora, valued at about $6.4 billion, had sales of $12.2 million in its most recent quarter. In just the first two days of this week, Aurora’s stock rose 12 percent and Tilray was up 23 percent. Tilray added another 11 percent in early trading Wednesday to above $100 a share, bringing its total gain since its July IPO to over 500 percent. Tilray has added more than $2.5 billion in market value since the Sept 7 close.

The market is expected to grow after legalization, but that still might not be enough to justify valuations.

Canada Base

“The investment narrative centers on their ability to use Canada as a home base from which they can expand internationally as the opportunity grows,” Andrew Kessner, analyst at U.S. brokerage William O’Neil & Co., wrote in a recent note.

In a situation reminiscent of the turn-of-the-century dot-com boom, cannabis companies that would be considered reasonably valued under normal circumstances, such as Hexo Corp., are being pressured by investors who want to see them achieve the same sky-high numbers as their competitors. Riposte Capital LLC last week urged Hexo to pursue “strategic alternatives,” pointing to the fact that its enterprise value is 8.1 times 2020 consensus Ebitda versus Tilray’s at 93.8 times or Canopy’s at 89.2 times. Riposte said a conservative multiple for Hexo would be 30 times Ebitda -- earnings before interest, taxes, depreciation and amortization.

The high valuations drew the attention of short-seller Andrew Left. Shares of the company Cronos Group Inc. sank recently after Left’s firm, Citron Research, said the stock should be trading at about a quarter of the price.

Reasonable Multiples

Once the industry reaches maturity, it’s likely the stocks will trade at multiples between those of a consumer products company and a pharmaceutical company -- somewhere between 12 times and 20 times forward Ebitda, said Matt Bottomley, an analyst at Canaccord Genuity Group Inc.

“Trying to pick what a reasonable multiple is on a one- or two- or three-year basis is not a very fruitful exercise because of how steep the growth profile is,” he said.

Until then, even the companies themselves acknowledge that it’s tough to know how valuable they are.

“Honestly, I don’t even know,” said Cam Battley, Aurora’s chief corporate officer. “Our CFO and I, we talk about this all the time. But nobody’s done this before.”